Australian Market Weekly_ 4 June 2012

7/31/2019 Australian Market Weekly_ 4 June 2012

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Australia > 4 June 2012

Australian Markets WeeklyA weekly outlook for Australia, key global economies and markets

National Australia Bank Research | 1

In this issue

RBA To Cut Again This Week 1International Economic Roundup 4FX Strategy 5

Interest Rate Strategy 6What to Watch Australia 7Weekly Calendar of Global Economic Releases 9Forecasts 10

Talking points

RBA To Cut Again This Week : RBA to cut again,

likely 25 bps; more to come. Global growth outlooktaking a turn for the worse. Soft domestic sectors

looking weaker. China and Indian growth slowing.

Treasury preparing plans for worst case Euro fallout.

Week ahead: RBA Board Tuesday, Employment

Thursday and Housing Finance Friday.International Economic Roundup: US labour market

improvement falters in May. Spains public finance

reforms running into recession and inertia/ monitoring

headwinds.Asias growth more than fraying at the

edges. Week ahead: real focus on Chinas May activity

and inflation data at the end of the week; Feds Beige

Book, services/non-manufacturing PMIs and the ECB

meeting.

FX Strategy: The AUD is likely to continue to be

influenced by broader global sentiment. Local data may

be mixed and the RBA is expected to ease. The AUD

spent May depreciating, with spot remaining above the

model AUD/USD estimate of 0.90. The risks remain to

the downside.Interest Rate Strategy: Recent global economic data

releases have confirmed that global growth has taken a

knock from the ongoing uncertainty in Europe. Our bond

and swap yield forecasts have been revised down due

to lower growth outlook. RBA to cut another 50bps to

3.25%, starting with 25bps next week.

RBA To Cut Again This WeekRBA to cut again, likely 25 bps; more to come

Global growth outlook taking a turn for the worse

Soft domestic sectors looking weaker

China and Indian growth slowing

Treasury preparing plans for worst case Euro fallout

Week ahead: RBA Board Tuesday, Employment

Thursday and Housing Finance Friday

RBA set to ease monetary policy again in June

Late last week, we changed our RBA rate call and we now expect

the RBA to cut the cash rate again at this weeks Board meeting,with a cut of 25bps taking the cash rate to 3.5%. We continue to

expect a further cut of 25bps in August, because we expect the

upcoming Q2 CPI (for release on 25 July) to confirm inflation at

the bottom of the target band.

We see the risk that the RBA may still go lower than the 3.25%

cash rate we are forecasting after the August Board meeting.If there is a meltdown in Europe, then we would expect much

more aggressive rate cuts from the RBA.

A key rationale for our change of heart is that the outlook for global

growth has deteriorated since the last Board meeting in May, due

to the Greek election and heightened fears that Greece may leave

the Euro, with undoubtedly negative but uncertain ramifications for

the Eurozone more generally.

Whilst it is by no means certain that Greece will leave the Euro,

the negative effects on confidence and activity from the past

months asset market falls are likely to worsen the recessionalready evident in Europe. Spain of course is also right in the mix,

also negatively affecting global confidence.

Data surprises turning ugly again

-250

-200

-150

-100

-50

0

50

100

150

200

Dec 05Jun 06Dec 06Jun 07De c 07Jun 08Dec 08Jun 09Dec 09Jun 10Dec 10Jun 11Dec 1 1Jun 1 2

Source: Citigroup

Australia

Economic data surprise index +/-

%

Australiaand China

Source: Citigroup

China

Source: Citigroup-250

-200

-150

-100

-50

0

50

100

150

200

Dec 0 5Jun 0 6Dec 0 6Jun 0 7Dec 0 7Jun 0 8Dec 0 8Jun 0 9Dec 0 9Jun 1 0Dec 1 0Jun 1 1Dec 1 1Jun 1 2

Source: Citigroup

United

States

Economicdata surprise index +/- %

Europe

Europe and the US
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Australian Markets Weekly 4 June 2012


If that were not concern enough for the stability of global financial

markets, negative data surprises from China and Asia more

generally (weakness in Indias Q1 GDP this week), will only addto the Boards concerns about the growth outlook for Australias

major trading partners at this weeks RBA Board meeting.

US data of course has also been lacklustre in the last little while.

Domestically, while our NAB Survey still is printing Business

Conditions just a touch below trend, the gap between the bestperforming Mining sector and poorly performing Retail and

Manufacturing sectors has been widening, notwithstanding

that the big employing sectors of health and education have

remained solid.

Domestic manufacturing struggling

Value added growth vs PMI

Aus: Manufacturing activity

Source: NAB Global Markets Research, Reuters EcoWin

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Index(diffusion)

25

30

35

40

45

50

55

60

65

70

Percent

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

AiG ManufacturingPMI, right

Manufacturingindustry valueadded, real, left

Our recently released NAB On-line Retail report for April was

very weak and official retail data for April posted a fall, confirming

the industry continues to struggle. Residential construction

and non-residential building is weak with approvals woeful.

Against that, investment in mining is booming but the sector

could delay projects if commodity demand slows - some publicannouncements of projects being delayed have already

been made.

Against this backdrop, with the likelihood that inflation is set

to stay low for the rest of the year at least, means that there is

room for the RBA to cut by a further 25bps, to provide some

fillip to domestic business and consumer confidence.

Local data still printing on the soft side

In addition to the weak building approvals data, there was yet

more confirmation of the Australian housing market on the

defensive, this came at the end of last week with the RP

Data-Rismark house prices report for May.

The RP Data-Rismark measure of established house prices

was down 1.4% across the capital cities, to be down now 5.3%

over the year, a faster rate of decline than has been evident over

recent months. In April for example, established house prices fell

0.8% to be down 4.5% over the year to April.

Regional prices fared somewhat better, to be down 0.2% in May,

off 1.4% in year to terms.

While we recognise that the data is not seasonally adjusted,

its clear that the trend has been evident for some time and theyear-to trend provides yet more confirmation of that.

The faster rate of decline evident in April in Victoria picked up pace

in May, prices down 2.7% in May after a 1.7% drop in April, prices

now down 8.4% over the year to May. Other state capitals alsogenerally showed continued weakness in May.

Sydney prices have not escaped the cautionary mood this month

(-1.2% in the month/-3.6% over the year), while Brisbane-Gold

Coast prices (-0.4%/-6.5%), Perth (-1.7%/-3.9%) and Hobart

(-1.2%/-8.9%) recorded further declines in May and on a year-to

basis. Adelaide prices rose 1.2% in May, but remain 2.4% lower

than year earlier levels. Among the smaller capitals, Darwin prices

had a setback for once (-2.4%/-1.2%) while in Canberra prices

were also soft (-1.5%/-0.9%) if more resilient to now than themajor capitals.

We could also add to that list the further weakness in Fridays AiGPMI Manufacturing index for May. The index slipped back to 42.4

from 43.9, and back to the lowest level since last September with a

pullback in both the production and the new orders index, both in

the low 40s and if that were not pressure enough some pick up in

input prices, at least for this month.

The growing wedge between mining and the rest

% of GDP, real terms

Business Capital Expenditure


Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

04 05 06 07 08 09 10 11 12

0

1

2

3

4

5

6

7

Mining

Manufacturing

"Other" industries

Treasury preparing for worst case contingencies

Speaking to the Senate estimates Committee this week, FederalTreasury Secretary made clear that his department is preparing

contingency plans should the situation unravel in Europe to extent

to clog up financial markets risking another global recession.

He noted how incredibly healthy the governments budget

position was relative to the rest of the world, and that is policy

makers would need to react is there was a clogging of the

financial system and a global recession. He noted plenty ofscope for monetary policy support, while for fiscal policy the

government could use automatic stabilisers and go back intodeficit to support activity.

This now thinking aloud of what he would be recommending if

Europe should fall apart is also a strong hint of his views going into

tomorrows RBA Board meeting. He would not likely be standingin the way of another easing in monetary policy this month, should

other members of the Board endorse that course of action, which

we expect they will.

The week ahead

And so, the RBA meets tomorrow with rising expectation that they

will cut the cash rate again. We have changed our RBA rate call,

now expecting the RBA to cut by 25bps next week.

This weeks survey of economists from Bloomberg has 14expecting a cut in the cash rate this week (one for 50 bps and 13

for 25 bps cut) out of 27 economists in the poll, up from just four

expecting a cut only a week ago. 13 expect no change in the RBA

cash rate. The market is priced for not only a 25 bps cut in thecash rate but pricing in a 50% chance that the cash rate will be


3/11



reduced by 50 bps. A year from now, the market is pricing in that

the cash rate will be almost at 2.25%, a cumulative cut in the cash

rate of 146 bps.

Market pricing for a re-run of the GFC

Market now pricing risk for abnormal disturbance/ global recession

RBA cash target and "what's priced in"

Implied OIS 4 quarters aheadSource: NAB Global Markets Research, Reuters EcoWin

03 04 05 06 07 08 09 10 11 12

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

RBA cash rate "pricedin", four quarters ahead

Actual RBAcash ratetarget

3yr benchmarkswap rate

As weve outlined above, the global economic outlook has

deteriorated, while domestically there is no threat to the inflationoutlook and softness across many domestic industries.

On the data front, a number of key releases next week. Q1 GDP

is released on Wednesday, and we look for a 0.6% rise for

3.3%yoy, although that forecast may be revised after the profits

and inventories numbers on Monday, and the net exports and

government spending figures on Tuesday.

Thursdays employment report also a key next week, where weexpect employment to fall 10K in May, pushing the unemployment

rate back up to 5.1% after the very low 4.9% reading in April.

On Friday, housing finance approvals in April are expected to be

weak again, while the monthly trade deficit should improve after a

fall in imports in April.

[email protected]

[email protected]


4/11



International Economic RoundupUS labour market improvement falters in May

Spains public finance reforms running into recession

and inertia/ monitoring headwinds

Asias growth more than fraying at the edges

Week ahead: real focus on Chinas May activity and

inflation data at the end of the week; Feds Beige Book,

services/non-manufacturing PMIs and the ECB

meeting

US employment growth slows; unemployment ticks up

The market was always going to be jumpy on the release of the

US payrolls report for May in the wake of a weaker-than-expected

official China PMI that slipped back 3 points to just over 50,

signs of slowing in the Chinese economy. The payrolls report was

underwhelming from most angles with not only a meagre 67k rise

in payrolls, half the growth expected, but net downward revisions

of recent history of 49k and a one tick rise in the unemployment

rate. The ISM was close to expectations, but even it slowed from54.8 to 53.5. Not even a 0.3% gain in consumer spending was

sufficient to shake the gloomy investor mood.

Slower jobs had tongues wagging over whether thered beanother round of Fed QE, with a rush for Treasuries and gold.

US 10-year yields fell to less than 1.5% and German bund yields

to 1.18%, yields unheard of in this lifetime in what was a very

defensive market.

US labour market hitting a flat spot

Employment change (mn, left); unemployment rate % (right)

US Labour Market


00 01 02 03 04 05 06 07 08 09 10 11 12

Percent

0

2

4

6

8

10

12

Person(millions)

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

Spanish fiscal program running to big headwinds

Spain reported this week that its deficit in the first four months ofthis year came in at a deficit of-25.5bn, up from a cumulative

shortfall for the deficit for the same time last year of -16.9bn.

This is not a good start to the current fiscal program - that is

looking increasingly ambitious day by day - to reduce the deficit

from 8.9% of GDP (well in excess of the targeted 6%) for 2011 to a

target deficit this year of 5.3%. Even in the now unlikely eventuality

that the Government meets its deficit target, debt to GDP, currently

at 68.5%, would stabilise at above an even higher 80% in 2014.

The Government forecasts that the economy will contract by 1.4%

for 2012.

For the year to date, Federal tax receipts are down 3%, with

VAT receipts down a hefty 8.2%, thanks to the retrenchment of

consumer spending, unemployment at 24.3%, and the economy

in the grip of recession again. And those year-to date central

government data come ahead of the inclusion of the recent

19bn government recapitalisation of bank Bankia. In the wordsof Spains central bank Governor Ordonez, appearing before

a Senate this past week, this fiscal consolidation will be

tremendously hard to achieve. Speaking about the outlook for

Spains economy and the troubled state of its public finances, henoted not only the difficulty of reaching its public finance targets

but the attention that needs to be given to budgetary monitoring at

different levels of government. He noted the need to adopt early

warnings and control monitoring of public finances not only at the

Federal level but also for all levels of Government given the highly

decentralised nature of its public finances. Ordonez noted the risks

to revenue forecasts given the weight of exports in growth (whichare under pressure from weakness in growth of its major trading

partners Italy and Portugal), weak consumption and of course the

depressed state of real estate markets. Given the weakened state

of the economy there are also upside risks to spending, as well as

a worrying inertia to restrain spending from within government/public administration.

In strong language he advocated publication of regional monthly

revenue and spending reports as soon as possible and thatthe law include coercive measures to ensure compliance with

budgetary targets by all levels of government. These comments

are far from anything approaching even a lukewarm endorsement

of current public finance monitoring and adherence systems.

Spains debt 80%: bank recapitalisation and more recession to come

153

123

113 112

89

79 79

107

22 24

0

20

40

60

80

100

120

140

160

180

Greece Italy Portugal Ireland F rance Germany Spain US China Australia

% of GDP

General Government Gross Debt - 2012 Estimates

Source: IMF Fiscal Monitor, April 2012

% of GDP

China and Indias growth slowing

There were further signs of weakness out of China and India.

The official Chinese Manufacturing PMI took a turn for the worse in

May, down to 50.4 from 53.3, the weakest for January and running

counter to its apparent trend of a mini-recovery in recent months

that was at odds of the slowing in industrial production growth.

This came in the wake of Indias March quarter GDP report thatrevealed a slowdown to 5.3% y/y from 6.1% over the course of

2011. Manufacturing industry has fallen 0.3% over the year to the

March quarter now the weakest of the broad industry groups, no

doubt suffering from the slowdown in exports, Indian exports were

down 5.7% over the year to March; thats a stark contrast to thepeak of 59.6% growth evident over the year to last July.

Offshore this week

China: Non-manufacturing PMIs, CPI, PPI, Industrial

production, Fixed assets investment, Retail sales, Trade;

India: Exports and imports, Services PMI

Japan: GDP revision, Current account

USA: Non-manufacturing PMI. Factory orders, Productivity,

Feds Beige Book, Jobless claims, Consumer credit, Trade

EC: Sentix Investor Confidence, Services PMI, Retail sales,GDP revision, ECB rate meeting

NZ: Terms of trade, ANZ Commodity prices, Building work

done

[email protected]
mailto:[email protected]:[email protected]:[email protected]


5/11



FX StrategyThe AUD is likely to continue to be influenced by

broader global sentiment. Local data may be mixed

and the RBA is expected to ease.

The AUD spent May depreciating, with spot remaining

above the model AUD/USD estimate of 0.90. The risks

remain to the downside.

AUD in May

The AUD spent much of May depreciating. A deteriorating

global environment weighed heavily on the high beta currency.

The AUD/USD dropped 6.8% in the month and the trade-weighted

AUD was down just shy of 5%. AUD/USD spot is the lowest since

November 2011 and the risks remain decidedly to the downside.

The RBA kicked off the AUDs move by lowering interest rates

more than expected at the May 1st meeting, but it was global

events that were the big driver of the decline. Europe was the

initial catalyst, with Greeces undecided elections and a swing

towards a party that might see Greece out of the EUR, raisingglobal risk aversion. Markets are very cautious about the

contagion from a Greek EUR exit. Suggestions of a Greek and

possible Spanish bank run contributed to the concern. Market

attention then turned to Spain, as Bankias liabilities became the

Governments obligations. The need to recapitalise Bankia hasseen Spains sovereign yields at levels consistent with the rest ofthe peripherys needing assistance from the EFSF. Spain refusesto accept that it needs help. So far this is not appeasing markets.

Towards the end of the month, global growth concerns have

become a more dominant force. Australias data remains very

mixed but not all bad. However, disappointing US data and

worsening European growth is raising fears over Chinasgrowth and the expansion plans of Australias mining sector.

Through the month, NABs economists revised the RBA forecaststwice and we end the month with an expected 25bp cut in both

June and August; ending the year at 3.25%. The risks remain to

the downside. We lowered our AUD forecasts and similarly, the

risks remain very much to the downside.

AUD versus the model estimate

Our model estimating where the AUD should be right now, based

on interest rate differentials, risk appetite, gold and metals prices

shows the AUD pressures to the downside. The model estimates

AUD/USD at 0.90. This is down from the April 27 estimate of

0.992. AUD/USD spot clearly remains above the estimate.

With EM outflows dominating, we may be approaching a period

where spot may catch-up with the model.

The biggest contribution to the lower AUD model estimate was the

drop in market risk appetite. As a global growth related currency,

deteriorating sentiment on global growth should worry the AUD

more than most currencies. This input has the potential to bounce

quickly if Europe resolves its problems. Unfortunately, we have

the Greek elections June 17 to get through, and Spains fundingpressures. The earliest date to provide a possible reprieve is at the

late June EU Leaders Summit.

With the RBA cutting interest rates and the market pricing for a lot

more easing, Australias eroding interest rate advantage is also a

driver of a lower AUD. While there may be too much priced into

the AUD rate curve, the additional easing expectations are likely

associated with the unknown European outcomes. Until such time

as EU problems ease, this gap is likely to remain.

Global commodity prices are lower across the board, including

metals. Gold prices are also lower, as the USD takes the mantle

as the reserve asset of current choice. With lower PMIs expected,

concerns about Chinas growth and Europe clearly slowing,

commodity prices may remain subdued. Golds ability to re-take itsreserve mantle may depend somewhat on the markets perception

of QE3.

We would suggest that the prevailing tensions mean a lower AUD

in the near term. A rebound depends most on global conditions,

particularly in Europe around the end of June. Worsening US and

Chinese economic data are also key.

AUD this week

Its a very busy week on the Australian, as well as global economiccalendar. The market is priced for a bigger than 25bp easing from

the RBA, while economists expect 25bp. A 25bp easing may not

help AUD as the additional easing gets pushed down the curve, with

European tensions remaining. Q1 domestic data should be solid but

the latest data may be on the soft side. China releases its suite of

monthly data next weekend which is particularly important for AUD,

and the global environment will dictate the broader direction.

Exhibit 1 AUD over May

Exhibit 2. What Moved AUD in May

-11.0

-9.0

-7.0

-5.0

-3.0

-1.0

1.0

Interest rates Metals prices Risk appetite Gold price Total

Source: Bloomberg, National Australia Bank. Note: Driver of the model since Apr 27 2012.

US cents

Exhibit 3 AUD/USD versus the Model

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Model estimate +/- 1standard deviation

Source: Bloomberg, National Australia Bank. Note Based on weekly 2-yr swap yield spread, JoC industrial metals prices, risk-appetite index and gold price.

AUD/USD

AUD/USD

[email protected]


6/11



Interest Rate Strategy Recent global economic data releases have

confirmed that global growth has taken a knock from

the ongoing uncertainty in Europe

Our bond and swap yield forecasts have been revised

down due to lower growth outlook

RBA to cut another 50bps to 3.25%, starting with

25bps next week

Recent Events

Economic data releases during last week confirmed that global

growth has taken a knock from the ongoing uncertainty in Europe.

Australian government bonds have remained in high demand

reaching new record lows. Three year rates are now below the 2%

mark, having rallied more than 40bps during the week to close at

1.96%. Similar demand in the long end of the curve has seen ten

year yields punched through 3% reaching 2.76% by the end of

the week. Bond swap spreads have continued to widen, as swap

yields have been unable to keep up with the government bond

rally. Three year swap rates closed the week at 2.95%, 36bps

lower and in almost a parallel fashion ten year swap rates gave

up 35bps ending at 3.75%.

The lack of decisive policy action in Europe is having an impact on

global growth. The uncertainty has meant that households have

become more frugal, delaying big item purchases while corporates

have become less optimistic on the future, pushing back capital

expenditure decisions. Despite printing a lower than expected PMI

number, policymakers in China have confirmed that there wont be

a repetition of the fiscal stimulus seen during the GFC, adding to

the concern around global growth. India is also slowing, at 5.3%

the Q1 GDP number was well below the 6% psychological mark

and market expectations. Until recently, the US was seen as thelast bastion of growth, but signs of weakness have begun to

emerge, this weeks Conference Boards Index of Consumer

Confidence fell 3.8pts to 64.9 in May, its lowest reading since

January. The Chicago PMI was also below market expectations

and Friday abysmal employment figures with 69k new jobs versus

the 150k expected by the market, confirmed that the US recovery

is losing momentum.

The thirst for safe havens has been a key factor keeping yields

lower across core sovereign bond markets including Australia.

But now, the deterioration of global growth prospects is also a

contributing factor.

Looking Ahead

The reassessment of the global growth outlook has meant that

our bond and swap yield forecasts have been revised down.

Risk aversion has been the main driver for the current record low

levels and while we expect risk appetite to eventually rise once

again, we no longer see yields rising as high as we previously

expected. Given the current global economic environment, we

suspect well see more rounds of unorthodox monetary policies

(QE and operation twist for instance) which will weigh on core

global government bond yields. Domestically, the safe haven

demand will provide further support to government yields as well

as the expected reduction in new bond supply.

NAB economists have pushed forward their RBA rate forecast,

starting with 25bps on Tuesday and another 25bps pencilledin for August. In addition to the ongoing European saga, the

deterioration in the global economic data means that the risk is

that the RBA may do more on Tuesday. All in all however, we

dont think the RBA will cut as much as what is currently priced by

the market (149bps over the next year), but as long as the RBA

stays on an easing bias, short yields are likely to remain around

the current low levels. A drastic policy action in Europe would

spur investors risk appetite and push yields higher, but as long as

Europe remains in a limbo bond and swap rate can potentially go

even lower.

Week Ahead

Profit and inventory numbers kick start a busy week

domestically, then all eyes will be on the RBA on Tuesday

while Q1 GDP numbers are released on Wednesday (NAB

expects 0.6%qoq/3.3%yoy) followed by employment figures on

Thursday. We expect employment to fall 10K in May, pushing

the unemployment rate back up to 5.1% after the very low

4.9% reading in April. The Fed releases its beige book economic

survey on Wednesday, GDP Numbers are also out in Europe

and the ECB and BOE have rate decisions on Wednesday and

Thursday respectively.

Views

Outright yields Swaps at new record low levels, but can go

lower still. Our new forecast means we no longer see yields

rising as high as we previously expected

Swap Yield Curve Mixed forces through 2012. 3/10 slope now+74bps and around the middle of our probable +50 to +90bps

range for 2012.

1: Whats priced in?

Period End Now Weekly Jun-12 Sep-12 Dec-12

RBA Cash rate 3.75 0.00 3.50 3.25 3.25

US Fed funds 0.25 0.00 0.25 0.25 0.25

ACGB10's 2.77 -0.33 3.10 3.40 3.50

UST10's 1.45 -0.29 1.75 2.00 2.00

Aus-US 10 year 132 -4 135 140 150

3 Year Swap Rate 2.95 -0.02 3.30 3.44 3.59

10 Year Swap Rate 3.74 -0.03 4.05 4.30 4.35

Aus 3/10 Swap Curve 80 -1 75 86 76

3 Year Swap Spread 98 8 95 85 80

2: Swap rates lower across the curve

[email protected] / [email protected]


7/11



What to Watch Australia (L = Last, F=Forecast, M = Market Median, n/f = not forecast)

Business Indicators, Q1 (Monday, 11.30)

The company profits and non-farm inventories data will be crucial

inputs into the Q1 GDP outcome.We expect to see a rise in both these statistics in Q1, with

profits in particular rebounding after a very weak Q4 2011

outcome. Company Gross Operating Profits fell by 6.5% in the

December quarter, with Mining down 8.7%, Manufacturing -5.1%,

Construction -4.2%, Wholesale -8.2%, and Financial and

Insurance -57.3% in the quarter.

In Q1, we expect to see profits rebound, with an increase of 2.0%

in the quarter. For inventories, we expect a 0.8% rise in Q1, after

the 1.4% gain in Q4, which would mean a quarterly detraction

from growth of around 0.3% in Q1.

Profits: L: -6.5%; F: +2.0%; Median: -2.5%

Inventories: L: 1.4%; F: 0.8%; Median: 0.7%

Profits to rebound after poor Q4 2011 result

Current account deficit, Q1 (Tuesday, 11.30)

Australias current account deficit widened to $8.4bn in Q4 from

$5.8bn in Q3. All the deterioration was in the value of trade in

goods and services (down $2.5bn to $3.6bn), whereas the net

income deficit was steady at -$11.8bn.

While there was an improvement in the real trade balance (export

volumes up 2.2% and import volumes up only 0.6%, leading to

the positive GDP contribution of 0.3pps), offsetting that was the

deterioration in the terms of trade. The terms of trade fell 4.6%

in the quarter, mostly due to a 5.5% fall in export prices (import

prices fell 0.7%). So in value terms, exports values rose only0.4% while import values rose 3.8%.

In Q1, we expect to see the current account deficit widen even

further, out to $12bn, after the large fall in export values in the

quarter. In volume terms, the deterioration in the real trade deficit

(again mainly due to a fall in export volumes) is expected to

detract around 0.6 percentage points off GDP.

L: -8.4bn; F: -12.0bn; Median: -14.8bn

CAD to deteriorate again in Q1 after fall in exports

$Abn

Australia's Current Account Deficit


Q1 Q1 Q1 Q1

00 01 02 03 04 05 06 07 08 09 10 11 12

AU

D(

billions)

-22.5

-20.0

-17.5

-15.0

-12.5

-10.0

-7.5

-5.0

-2.5

RBA Cash Rate Announcement, (Tuesday, 14.30)

The RBA meets on Tuesday and we expect them to cut the cash

rate by 25 basis points to 3.50%.

Elevated European uncertainty and signs of slower activity in

China and India as well as weaker commodity prices givethe RBA enough reason to cut again to try to boost domestic

confidence and activity. With inflation clearly undershooting in

the near term there appears to be little danger for the RBA to cut

again so soon after the aggressive 50 basis points cut in May.

Previously we had expected 25 point rate cuts in August and

September. Effectively we have brought forward the timing

of the cuts. Our rate profile now has cuts in June and August

(post a lower than expected CPI in the June quarter asevidenced by continued retail discounting in our recent Monthly

Business Survey).

L:3.75%; F: 3.50%; Median:3.75%

Another cash rate cut coming soon

RBA Cash Rate

Source: Reuters EcoWin

92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Percent

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Percent

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

(f)


8/11



What to Watch Australia (L = Last, F=Forecast, M = Market Median, n/f = not forecast)

GDP, Q1 (Wednesday, 11.30)

Q1 GDP is released on Wednesday, and we look for a 0.6%

rise for 3.3%yoy, although that forecast may be revised after the

profits and inventories numbers on Monday, and the net exports

and government spending figures on Tuesday.

After growth of just 0.4% in Q4, we are looking for a stronger

rise in Q1, supported by the strength of private consumption and

business investment.

Dwelling investment, public spending and net exports are likely to

detract from growth.

Looking ahead, we expect that business investment will drive

most of the growth through 2012, but the recovery in residential

construction is taking much longer than anticipated. Meanwhile

household consumption is expected to continue growing at a

steady pace while government spending will ease.

L: 0.4%/2.3%; F: 0.6%/3.3%; Median: 0.5%/3.2%

GDP forecast to rise 0.6% in Q1

A u s t r a li a n G D P

So u r ce : Re u te r s Eco W in

0 0 0 1 02 0 3 0 4 0 5 0 6 07 08 09 1 0 11 12

Percent

-1

0

1

2

3

4

5

6

Percent

-1

0

1

2

3

4

5

6

A n n u a l G D P

Q u a r t e r ly G D P G r o w t h

(f )

Employment, May (Thursday, 11.30)

The upside surprise in Aprils jobs report is expected to be

partially reversed in May. Employment rose 15.5K in April,

with the unemployment rate falling to 4.9% from 5.2%, after

the participation rate fell further to 65.1%.

The really interesting thing about the April data was that the

participation rate fell at the same time as employment rose.

Normally these two series move in lock-step (jobs up; part rate

up and vice versa). It could be that all the negative talk about the

economy is starting to effect confidence across households and

this has led to this unusual divergence. Consumer confidence hasbeen quite weak, despite the unemployment rate remaining at

5.2% or lower for seven months now.

In May, we expect to see employment fall 10K, with the

participation rate easing to 65.1%. That would see the

unemployment rate rise back above 5% to 5.1% in May.

L: Empl: +15.5K; Unemployment rate: 4.9%; Part rate: 65.2%F: Empl: -10K; Unemployment rate: 5.1%; Part rate: 65.1%

Unemployment rate fell to 4.9% in April

A u s t r a li a n L a b o u r M a r k e t

So u r ce : NAB G lo b a l Ma r ke ts Re se a r ch , Re u te r s Eco W in

0 4 05 0 6 07 08 0 9 10 1 1 1 2

Percent

0

1

2

3

4

5

6

Percent

0

1

2

3

4

5

6

U n e m p l o y m e n t r a t e

A n n u a l E m p l o y m e n t G r o w t h

International Trade, April (Friday, 11.30)

The trade balance for March recorded a deficit of $1.59bn, up

from the deficit of $754mn in February, meaning that Australiarecorded three deficits in a row for the first three months of

2012, after a string of surpluses over the period from April 2010

onwards (except for the QLD flood affected Feb-11 result).

The key reason for the deterioration in March was a surge in

imports which rose by 5%. While exports rose by 2%, the level is

still well below the Q4 2011 outcomes. Commodity prices have

eased and coal exports in particular are still suffering from the

strikes in Queensland.

In April a 3% fall in imports will improve the trade deficit to around

$1.2bn, but exports are expected to be flat in the month, impacted

by the fall in commodity prices.

L: -1587m; F: -1200m; Median:-900m

Weak exports hurting Australias trade position

A us t r a l ian T r ade B a l ance

G oo d s a n d S e rv ic e s b a la n c e E x p o r ts Im po rtsSo u r ce : NAB G lo b a l Ma r ke ts Re se a r ch , Re u te r s Eco W in

J an Ja n J an Ja n J an J an

07 08 0 9 10 1 1 12

AUD(

billions)

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

AUD(

billions)

0. 0

2. 5

5. 0

7. 5

10 .0

12 .5

15 .0

17 .5

20 .0

22 .5

25 .0

27 .5

30 .0

E x p o r t s ( L H S )

I m p o r t s ( L H S )

T r a d e B a l a n c e (R H

[email protected]


9/11



Weekly Calendar of Global Economic ReleasesTime NAB

Country Economic Indicator Period Forecast Consensus Actual Previous GM T A ES T

NZ Queen's Birthday Holiday

UK Diamond Jubi lee Bank Hol iday

AU TD Securities Inflation MAY 0.3%/1.9% 0.30 10.30

AU Company Operating Profit QoQ% 1Q 2.0% -2.5% -6.50% 1.30 11.30AU Inventories 1Q 0.7% 1.40% 1.30 11.30

AU ANZ Job Advertisements (MoM) MAY -3.10% 1.30 11.30

EC Euro-Zone PPI (MoM/YoY) APR 0.2%/2.7% 0.5%/3.3% 9.00 19.00

US Factory Orders APR 0.3% -1.5% 14.00 0.00

EC Bil ls auctions in France and Netherlands

UK Diamond Jubi lee Bank Hol iday

AU AiG Performance of Service Index MAY 39.6 23.30 9.30

AU Current Account Balance 1Q -12B -14.8B -8.4B 1.30 11.30

AU Net Exports Contribution 1Q -0.6pps -0.6pps +0.3pps 1.30 11.30

AU Government Expenditure 1Q 1.30 11.30

CH China HSBC Services PMI MAY 54.1 2.30 12.30

AU RBA CASH TARGET JUN 3.50% 3.75% 3.75% 4.00 14.00

IN Markit Services PMI MAY 5.00 15.00

GE PMI Services MAY F 52.2 52.2 7.55 17.55

EC PMI Services MAY F 46.5 46.9 8.00 18.00

EC PMI Composite MAY F 45.9 46.7 8.00 18.00EC Euro-Zone Retail Sales APR -0.2%/-1.1% 0.3%/-0.2% 9.00 19.00

GE Factory Orders (MoM/YoY) APR -1.0%/-3.8% 2.2%/-1.3% 10.00 20.00

US ISM Non-Manf. Composite MAY 53.8 53.5 14.00 0.00

NZ Crown Financial Statements APR 22.00 8.00

NZ Building Work Put in Place 1Q 3.0% 2.9% 22.45 8.45

UK BRC Shop Price Index (YoY) MAY 1.3% 23.01 9.01

UK Lloyds Business Barometer MAY 26 23.01 9.01

AU Gross Domestic Product (QoQ/Yo 1Q 0.6%/3.3% 0.5%/3.2% 0.4%/2.3% 1.30 11.30

UK PMI Construction MAY 51.0 54.6 55.8 8.30 18.30

EC Euro-Zone GDP s.a. (QoQ) 1Q P 0.0% 0.0% 9.00 19.00

GE Germany to Sell Add'l 5b 5-Year Notes 9.30 19.30

PO Portugal to Sell 6-Month and 12-Month Bills 9.30 19.30

GE Industrial Production MoM (sa)/YoY APR -1%/0.8% 2.8%/1.6% 10.00 20.00

EC ECB Announces Interest Rates JUN 1.00% 1.00% 1.00% 11.45 21.45

US Fed's Lockhart Speaks on Economy in Fort Lauderdale, Florida 12.15 22.15

US Nonfarm Productivity 1Q F -0.60% -0.50% 12.30 22.30US Fed Releases Beige Book Economic Survey 18.00 4.00

AU AiG Perf of Construction Index MAY 34.9 23.30 9.30

UK BRC Like-for-like sales (YoY) MAY -3.3 23.01 9.01

AU Emp Chng/Unemp/Part rate MAY -10K/5.1%/65.1% 0K/5.1%/65.2% 15.5K/4.9%/65.2% 1.30 11.30

UK PMI Services MAY 51.0 52.8 53.3 8.30 18.30

EC Bond auc tions in France and 9.00 19.00

UK BOE ANNOUNCES RATES JUN 0.50% 0.50% 0.50% 11.00 21.00

UK BOE Asset Purchase Target JUN 325bn 325bn 325bn 11.00 21.00

US Initial Jobless Claims Jun-02 383K 12.30 22.30

US Fed's Lockhart Speaks on U.S. Economy in Georgia (V) 16.10 2.10

US Fed's Kocherlakota Speaks in Minneapolis (NV) 17.15 3.15

US Consumer Credit APR $10.0B $21.4B 19.00 5.00

NZ Wholesale Trade 1Q 2.5% 22.45 8.45

JN Gross Domestic Product (QoQ) 1Q F 1.00% 23.50 9.50

AU Home Loans MoM APR -2.0% 0.0% 0.3% 1.30 11.30AU Trade Balance APR -1200M -900M -1587M 1.30 11.30

AU RBA's Stevens Gives Speech to Chamber of Commerce in Adelaide 2.15 12.15

UK PPI Input Prices (MoM/YoY) MAY -1.0%/1.8% -1.2%/1.6% -1.5%/1.2% 8.30 18.30

UK PPI Output Prices (MoM/YoY) MAY 0.2%/3.3% 0.2%/3.3% 0.7%/3.3% 8.30 18.30

UK PPI Output Core Prices MAY 0.8%/3.0% 0.2%/2.3% 0.6%/2.3% 8.30 18.30

US Trade Balance APR -$49.4B -$51.8B 13.30 23.30

CH CPI (YoY) MAY 3.2% 3.4% 1.30 11.30

CH PPI (YoY) MAY -1.1% -0.7% 1.30 11.30

CH Industrial Production YoY MAY 9.8% 9.3% 1.30 11.30

CH Fixed Asset Investment MAY 20.0% 20.2% 1.30 11.30

CH Retail Sales MAY 14.1% 14.1% 1.30 11.30

CH Trade Balance MAY $16.1bn $18.4bn 1.30 11.30

Upcoming Central Bank Interest Rate Announcements

Australia, RBA 5-Jun 3.50% 3.75% 3.75%

Canada, BoC 5-Jun 1.00% 1.00% 1.00%

Europe ECB 6-Jun 1.00% 1.00% 1.00%UK BOE 7-Jun 0.50% 0.50% 0.50%

New Zealand, RBNZ 14-Jun 2.50% 2.50% 2.50%

Japan, BoJ 15-Jun 0.0%-0.1% 0.0%-0.1% 0.0%-0.1%

India, RBI 18-Jun 8.00%

US Federal Reserve 20-Jun 0%-0.25% 0%-0.25% 0%-0.25%

GMT: Greenw ich Mean Time; AEST: Australian Eastern Standard Time; r: Revised

Wednesday, 6 June 2012

Thursday, 7 June 2012

Friday, 8 June 2012

Monday, 4 June 2012

Tuesday, 5 June 2012

Saturday, 9 June 2012


10/11



Forecasts

Economic Forecasts

2011 2012 2013

Australia Forecasts 2011 2012 2013 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Household Consumption 3.4 3.6 2.9 0.8 1.0 1.1 0.5 1.4 0.7 0.6 0.6 0.8 0.8 0.7 0.7

Business Investment 19.6 17.3 14.7 5.9 0.2 17.2 -1.2 4.3 3.3 2.9 2.9 3.7 3.8 4.1 3.8 Residential Construction 1.1 -9.7 7.3 3.0 -0.7 -0.2 -3.9 -4.3 -3.0 -1.4 1.6 2.3 3.3 3.5 3.1

Government Spending -0.6 -1.0 -0.7 0.3 0.4 -2.7 0.9 -0.1 -0.1 -0.3 -0.4 -0.3 -0.1 0.2 0.2

Exports -1.6 4.0 5.5 -6.3 3.0 2.2 2.2 -2.3 2.0 2.1 1.1 1.3 1.1 1.1 1.1

Imports 11.5 6.2 7.6 2.3 3.4 5.8 0.7 0.2 1.0 1.1 1.3 2.0 2.3 2.5 2.4

Net Exports* -2.7 -0.6 -0.8 -1.8 -0.2 -0.9 0.3 -0.5 0.2 0.1 -0.1 -0.2 -0.3 -0.4 -0.4

Inventories* 0.6 -0.1 -0.1 0.0 0.7 -1.1 0.9 -0.3 -0.1 0.0 -0.2 0.0 0.0 0.1 0.0

Domestic Demand - qtr% 1.4 0.6 2.2 0.2 1.1 0.7 0.7 0.8 1.1 1.2 1.3 1.3

Dom Demand - ann % 4.0 4.0 4.3 3.6 3.3 4.9 4.4 3.4 3.3 1.8 2.5 3.2 4.0 4.7 5.1

Real GDP - qtr % -0.3 1.4 0.8 0.4 0.5 0.7 0.8 0.7 0.9 1.0 1.1 1.0

Real GDP - ann % 2.0 2.7 3.6 1.2 2.0 2.6 2.3 3.2 2.5 2.4 2.7 3.1 3.4 3.7 4.0

CPI headline - qtr % 1.6 0.9 0.6 0.0 0.1 0.6 1.3 0.8 0.6 0.6 0.7 0.8

CPI headline - ann % 3.4 1.8 3.0 3.3 3.6 3.5 3.1 1.6 1.2 1.9 2.7 3.3 3.3 2.7 2.7

CPI underlying - qtr % 0.8 0.8 0.3 0.6 0.3 0.5 0.6 0.6 0.6 0.5 0.7 0.7

CPI underlying - ann % 2.6 2.1 2.4 2.4 2.7 2.5 2.6 2.1 1.8 2.1 2.1 2.4 2.4 2.4 2.5

Wages (Pvte WPI - qtr % 0.9 0.8 0.9 1.0 0.8 0.8 0.8 0.8 0.8 0.6 0.6 0.6

Wages (Pvte WPI -ann % 3.8 3.5 2.9 4.0 3.9 3.7 3.8 3.6 3.6 3.5 3.2 3.2 3.0 2.8 2.6

Unemployment Rate (%) 5.2 5.3 5.3 5.2 5.0 5.3 5.1 5.2 5.3 5.5 5.4 5.4 5.4 5.2 5.2

Terms of trade 14.1 -10.1 -3.5 3.1 5.4 3.2 -4.7 -5.8 -3.9 -1.7 -0.5 -0.7 -0.5 -0.4 -0.4

G&S trade balance, $Abn 18 .1 -21 .4 -41 .6 2.4 6.1 6.1 3.6 -3.3 -5.4 -6.1 -6.7 -8.0 -9.5 -11.2 -12.8

Current Account (% GDP) -2.2 -5.2 -6.3 -3.2 -1.8 -1.6 -2.3 -4.7 -5.2 -5.4 -5.5 -5.8 -6.1 -6.5 -6.8

Source: NAB Group Economics; (*) Contributions to GDP growth

Exchange Rate Forecasts Global GDP

4-Jun Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 2010 2011 2012 2013

Majors Australia 2.5 2.0 2.7 3.6

AUD/USD 0.964 1.00 0.98 0.97 0.96 0.96 0.96 0.95 US 3.0 1.7 2.3 3.1

NZD/USD 0.751 0.79 0.79 0.82 0.81 0.80 0.79 0.78 Eurozone 1.7 1.5 -0.6 1.1

USD/JPY 78.1 78 79 82 83 83 84 85 UK 1.3 0.8 0.7 1.8

EUR/USD 1.240 1.29 1.28 1.33 1.34 1.35 1.36 1.37 Japan 4.5 -0.9 2.7 2.2GBP/USD 1.535 1.61 1.63 1.64 1.64 1.62 1.61 1.60 China 10.4 9.2 8.0 8.2

USD/CNY 6.370 6.29 6.28 6.27 6.25 6.20 6.15 6.10 India 9.0 7.1 6.0 6.5

USD/CAD 1.044 1.01 1.02 1.02 1.03 1.03 1.03 1.04 New Zealand 1.3 1.7 2.3 2.7

World 5.2 3.7 3.2 3.7

Australian Cross Rates

AUD/JPY 75.3 78 77 80 80 80 81 81 Commodity prices ($US)AUD/EUR 0.778 0.78 0.77 0.73 0.72 0.71 0.71 0.69 4-Jun Jun-12 Dec-12 Dec-13

AUD/GBP 0.628 0.62 0.60 0.59 0.59 0.59 0.60 0.59 WTI oil 82.51 100 104 112

AUD/NZD 1.284 1.27 1.24 1.19 1.19 1.20 1.22 1.22 Gold 1617 1610 1500 1340

AUD/CNY 6.141 6.29 6.15 6.08 6.00 5.95 5.90 5.80 Iron ore 135 130 120 120

AUD/CAD 1.006 1.01 1.00 0.99 0.99 0.99 0.99 0.99 Hard coking coa l 235 210 215 205

AUD/CHF 0.934 0.93 0.93 0.89 0.88 0.88 0.88 0.87 Thermal coal 92 115 115 115

Copper 7379 7900 7860 7960

Interest Rate Forecasts

4-Jun Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

Aust rates

RBA Cash rate 3.75 3.50 3.25 3.25 3.25 3.25 3.50 3.75

3 month bill rate 3.36 3.9 3.7 3.7 3.6 3.7 3.9 4.2

3 Year Swap Rate 2.95 3.3 3.4 3.6 3.7 3.9 4.1 4.2

10 Year Swap Rate 3.75 4.1 4.3 4.4 4.6 4.5 4.7 4.9

Offshore Policy Rates

US Fed funds 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

ECB refi rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

BoE repo rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

BoJ overnight call rate 0.10 0.10 0.10 0.10 0.50 0.10 0.10 0.10

RBNZ OCR 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50

China 1yr lend ing rate 6.56 6.56 6.31 6.31 6.31 6.56 6.81 6.81

China Reserve Ratio 20.0 18.5 17.5 17.5 17.5 17.5 17.5 17.5

10 Year Benchmark Bond Yields

Australia 2.72 3.10 3.40 3.50 3.75 3.75 4.00 4.25

United States 1.45 1.75 2.00 2.00 2.25 2.25 2.50 2.75

Europe/Germany 1.17 1.5 1.8 1.8 2.0 2.0 2.3 2.3

UK 1.53 1.8 2.0 2.0 2.3 2.3 2.5 2.8

New Zealand 3.28 4.5 4.8 5.2 5.2 5.3 5.3 5.3

Annual % Chng Quarterly % Chng


11/11


Global Markets Research

Australia

Peter Jolly

Head of Research, Australia

+61 2 9237 1406

MacroeconomicsRob Henderson

Chief Economist, Markets

+61 2 9237 1836

Spiros Papadopoulos

Senior Economist

+61 3 8641 0978

David de Garis

Senior Economist

+61 3 8641 3045

Currency StrategyEmma Lawson

Senior Currency Strategist

+61 2 9237 8154

Interest Rate StrategySkye Masters

Head of Interest Rate Strategy

+61 2 9295 1196

Rodrigo Catril

Interest Rate Strategist

+61 2 9293 7109

Credit ResearchMichael Bush

Head of Credit Research

+61 3 8641 0575

Ken Hanton

Senior Credit Analyst

+61 2 9237 1405

EquitiesPeter Cashmore

Senior Real Estate Equity Analyst

+61 2 9237 8156

Jenny Khamphet

Senior Real Estate Equity Analyst

+61 2 9237 9538

Design and DistributionBarbara Leong

Desktop Publisher

+61 2 9237 8151

New Zealand

Stephen Toplis

Head of Research, NZ

+64 4 474 6905

Craig Ebert

Senior Economist

+64 4 474 6799

Doug Steel

Markets Economist

+64 4 474 6923

Mike Jones

Currency Strategist

+64 4 924 7652

Kymberly MartinStrategist

+64 4 924 7654

Design and DistributionYvonne Liew

Publications Administrator

+64 4 474 9771

UK/Europe

Nick ParsonsHead of Research, UK/Europe,

and Global Head of FX Strategy

+ 44 207 710 2993

Gavin Friend

Markets Strategist

+44 207 710 2155

Tom Vosa

Head of Market Economics

+44 207 710 1573

Design and DistributionDerek Allassani

Research Production Manager

+44 207 710 1532

Group Economics

Alan Oster

Group Chief Economist

+61 3 8634 2927

Tom Taylor

Head of Economics, International

+61 3 8634 1883

Rob Brooker

Head of Australian Economics

+61 3 8634 1663

Alexandra Knight

Economist Australia

+(61 3) 9208 8035

Michael CreedEconomist Agribusiness

+(61 3) 8634 3470

Dean Pearson

Head of Industry Analysis

+(61 3) 8634 2331

Robert De Iure

Senior Economist Property

+(61 3) 8634 4611

Brien McDonald

Economist Industry Analysis

+(61 3) 8634 3837

Gerard Burg

Economist Industry Analysis

+(61 3) 8634 2778

John Sharma

Economist Sovereign Risk

+(61 3) 8634 4514

James Glenn

Economist Asia

+(61 3) 9208 8129

Tony KellyEconomist International

+(61 3) 9208 5049

Important NoticeThis document has been prepared by National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 ("NAB"). Any advice contained in this document has been prepared

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Documents

Australian Market Weekly_ 4 June 2012